Bernie Madoff

WHO IS 'Bernie Madoff'

Bernard Lawrence "Bernie" Madoff is an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors of tens of billions of dollars over the course of at least 17 years, and possibly longer. He was also a pioneer in electronic trading and chair of the Nasdaq in the early 1990s.

Despite claiming to generate large, steady returns through an investing strategy called "split-strike conversion" (which does exist), Madoff simply deposited client funds into a single bank account, which he used to pay clients who wanted to cash out. He funded redemptions by attracting new investors and capital, but was unable to maintain the fraud when the market turned sharply downwards in late 2008. He confessed to his sons – who worked at his firm but, he claims, were not aware of the scheme – on December 10 of that year. They turned him into the authorities the next day.

The fund's last statements indicated it had $64.8 billion in client assets. As of May 12, 2017, the Securities Investor Protection Corporation-appointed trustee has recovered around $11.6 billion of the estimated $17.5 billion that clients paid into the fund; around $9.1 billion of those funds have been distributed to defrauded investors.

Madoff pleaded guilty to 11 federal felony counts in 2009, including securities fraud, wire fraud, mail fraud, perjury, and money laundering. He is currently 79 years old. His release date is November 14, 2139.

The Ponzi scheme became a potent symbol of the culture of greed and dishonesty that, to critics, pervaded Wall Street in the run-up to the financial crisis. While Madoff was sentenced to 150 years and prison and ordered to forfeit $170 million in assets, no other prominent Wall Street figures faced legal ramifications in the wake of the crisis.

Madoff's Beginnings

Bernie Madoff was born in Queens, New York in 1938 and began dating his future wife Ruth (née Alpern) when both were in their early teens. Speaking by phone from prison, Madoff told Steve Fishman that his father, who had run a sporting goods store, went out of business due to steel shortages during the Korean War: "You watch that happen and you see your father, who you idolize, build a big business and then lose everything." Fishman says that Madoff was determined to achieve the "lasting success" his father hadn't, "whatever it took," but Madoff's career had its ups and downs. (See also, EvaluationDomains's Guide to Watching 'Wizard of Lies,' HBO's Madoff Movie.)

He started his company, Bernard L. Madoff Investment Securities LLC, in 1960, at age 22. At first he traded penny stocks with $5,000 (worth around $41,000 in 2017) he had earned installing sprinklers and working as a lifeguard. He soon persuaded family friends and others to invest with him. When the "Kennedy Slide" lopped 20% off the market in 1962, Madoff's bets soured and his father-in-law bailed him out.

Madoff had a chip on his shoulder and felt constantly reminded that he was not part of the Wall Street in-crowd. "We were a small firm, we weren't a member of the New York Stock Exchange," he told Fishman. "It was very obvious." According to Madoff, he began to make a name for himself as a scrappy market maker. "I was perfectly happy to take the crumbs," he told Fishman, giving the example of client who wanted to sell eight bonds; a bigger firm would disdain that kind of order, but Madoff's would complete it.

Success came when he and his brother Peter began to build electronic trading capabilities – "artificial intelligence" in Madoff's words – that attracted massive order flow and boosted the business by providing insights into market activity. "I had all these major banks coming down, entertaining me," Madoff told Fishman. "It was a head trip." He and four other Wall Street mainstays processed half of the New York Stock Exchange's order flow – controversially, he paid for much of it – and by the late 1980s Madoff was making in the vicinity of $100 million a year. He would become chairman of the Nasdaq, serving in 1990, 1991 and 1993.

The Scheme

It is not certain exactly when Madoff's Ponzi scheme began. He testified in court that it started in 1991, but his account manager Frank DiPascali, who had been working at the firm since 1975, said the fraud had been occurring "for as long as I remember."

Even less clear is why Madoff carried out the scheme at all. "I had more than enough money to support any of my lifestyle and my family's lifestyle. I didn't need to do this for that," he told Fishman, adding, "I don't know why." The legitimate wings of the business were extremely lucrative, and Madoff could have earned the Wall Street elites' respect solely as a market-maker and electronic trading pioneer. 

Madoff repeatedly suggested to Fishman that he was not entirely to blame for the fraud. "I just allowed myself to be talked into something and that's my fault," he said, without making it clear who talked him into it. "I thought I could extricate myself after a period of time, I thought it would be a very short period of time, but I just couldn't."

The so-called Big Four have attracted attention for their long and profitable involvement with Bernard L. Madoff Investment Securities LLC. Madoff's relationships with Carl Shapiro, Jeffry Picower, Stanley Chais and Norm Levy go back to the 1960s and 1970s, and his scheme netted them hundreds of millions of dollars each. "Everybody was greedy, everybody wanted to go on and I just went along with it," Madoff told Fishman. He has indicated that the Big Four and others – a number of feeder funds pumped client funds to him, some all but outsourcing their management of clients' assets – must have suspected the returns he produced, or at least should have. "How can you be making 15 or 18 percent when everyone is making less money?" Madoff said told Fishman.

These apparently ultra-high returns persuaded clients to look the other way. In fact Madoff simply deposited their funds in an account at Chase Manhattan Bank – which merged to become JPMorgan Chase & Co. (JPM) in 2000 – and let it sit. The bank, according to one estimate, may have made as much as $483 million from those deposits, so it was not inclined to inquire either. When clients wished to redeem their investments, Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and a touch of theater: though his model depended on attracting new capital, he would turn away clients to cultivate an image of exclusivity. (See also, ABC's Madoff Miniseries Exposes His Smarm, Charm.

The model allowed roughly half of Madoff's investors to cash out at a profit. These investors have been required to pay into a victims' fund to compensate defrauded investors who lost money. (See also, 6 Ways to Avoid an Investment Ponzi Scheme.)

Busted

Madoff was almost caught on more than one occasion. In 1999 financial analyst Harry Markopolos calculated in the space of an afternoon that Madoff had to be lying. The Securities and Exchange Commission (SEC) ignored him, and it was not until 2005 – shortly after Madoff nearly went belly-up due to a wave of redemptions – that the regulator asked him for documentation on Madoff's trading accounts. He made up a six-page list, the SEC drafted letters to two of the firms listed, didn't send them, and that was that. "The lie was simply too large to fit into the agency's limited imagination," writes Diana Henriques, author of "The Wizard of Lies," which documents the episode. The SEC was excoriated in 2008, following the revelation of Madoff's fraud as well as wrongdoing by major banks in the markets for mortgage-backed securities and collateralized debt obligations. The Economist speculated that the regulator could be dismantled, but it remains intact.

In November 2008, Bernard L. Madoff Investment Securities LLC reported year-to-date returns of 5.6%; the S&P 500 had dropped 39.0% over the same period. As the selling continued, Madoff became unable to keep up with a cascade of client redemption requests and, on December 10 – according to the account he gave Fishman – confessed to his sons Mark and Andy, who worked at their father's firm: "The afternoon I told them all, they immediately left, they went to a lawyer, the lawyer said you gotta turn your father in, they went, did that, and then I never saw them again."

Madoff has insisted he acted alone, though several of his colleagues were sent to prison. Mark Madoff committed suicide exactly two years after his father's fraud was exposed. Several of Madoff's investors also killed themselves. Andy Madoff died of cancer in 2014. 

Bernie Madoff was sentenced to 150 years in prison and forced to forfeit $170 billion in 2009. His three homes and yacht were auctioned off by the U.S. Marshals. He resides at the Butler Federal Correctional Institution in North Carolina, where he is prisoner #61727-054. (See also, Bernie Madoff Runs a Hot Chocolate Monopoly in Prison.)

'Bernie Madoff'